Learn About the Advantages of Mutual Fund Investing
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In basic terms, a mutual fund is a company whose main objective is to professionally invest a pool of money in securities and earn a positive return for shareholders. In this way, these companies allow you to “mutually” share the rewards and risks of investing, hence their name.
Buying shares in a mutual fund actually gives you stock or bond holdings in various companies, based on the underlying investments. Your shares are pooled together with other investors’ shares, and the combined assets give you access to a level of diversification that you may not otherwise be able to obtain.
It’s always important to remember that mutual fund investing involves risk, and your investment may be worth more or less than the original cost when redeemed. Your principal and investment return will fluctuate in value, so it’s important to understand a few basics about these funds.
Mutual fund investing may offer several benefits for individual investors. For starters, funds are managed by experienced, full-time money managers. They research market and economic trends, and then use the information they gather to make decisions about buying, holding or even selling securities to enhance returns.
Another distinct advantage is diversification, one of the basic tenets of successful investing. By spreading your money over a number of investments, a mutual fund doesn’t depend on any one investment for your return. And on the other side of the coin, the impact of one poor performer on your entire portfolio is also reduced.
Mutual funds also offer several convenient features, such as automatic reinvestment, systematic payments and no-cost exchanges. If you choose to, you can automatically reinvest any dividends and capital gains (profits) to purchase more mutual fund shares. Mutual funds can also provide you with monthly or quarterly automatic withdrawals.
You can often exchange assets from one fund to another fund within the same group of funds — also known as a fund family — without incurring any additional sales charges. However, be aware that some funds may impose short-term or other redemption fees. Be sure to read the fund prospectus for details, and know that exchanges between funds may be a taxable event.
Relatively speaking, mutual funds can be purchased with a low minimum investment. After an initial payment of $250 (some funds may require more or less), most mutual funds require as little as $25 or $50 at a time for additional investments. If you think about how many individual securities you could purchase for that same amount, you can see the benefits of investing in funds instead. These low minimums can make it easier for you to build a well-diversified investment portfolio.
One other advantage to mutual funds is their liquidity. Many funds offer you the ability to sell any or all of your fund shares on any business day the markets are open. A fund’s net asset value — often referred to as NAV — is the dollar value of one share in the fund, and the price a fund pays you per share when you sell. The NAV is calculated by totaling the value of all the fund’s holdings, subtracting expenses, and dividing by the number of shares.
Your redemption value when you decide to sell shares of a fund you own will be based on the next closing NAV minus sales charges, if any. Most funds impose a sales charge at the time of purchase, but some choose to impose a charge upon redemption instead. Because of these charges, and fluctuations in the NAV, mutual-funds are considered long-term investments.
There are literally thousands of mutual funds available today, offering a wide range of investment objectives and specializing in specific categories or types of securities. With all the options out there, chances are you will be able to find funds that fit in your overall investment mix.
This article was written by Wells Fargo Advisors and provided courtesy of Jonathan Buoni in Northampton, MA at 413-585-1432. Investments in securities and insurance products are: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE. Wells Fargo Advisors, LLC, Member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company.
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